The Moderating Effect of CEO Power on the Board Composition–Firm Performance Relationship

The Moderating Effect of CEO Power on the Board Composition–Firm Performance Relationship*

James https://www.doczj.com/doc/3813790605.html,bs,David J.Ketchen Jr,Alexa A.Perryman and Maura S.Donahue

Florida State University;Auburn University,Alabama;Florida State University;University of Dayton,Ohio abstract Prior studies of the relationship between the composition of boards of directors and ?rm performance offer equivocal results.Drawing on agency and power circulation theories,we attempt to reduce this equivocality by asserting that CEO power moderates the relationship.Speci?cally,an outside director dominated board is needed to check a powerful CEO,but monitoring by other executives provides suf?cient constraints on CEOs with low power.We used event study methodology to test the effects of the interaction between board composition and CEO power on stock market reaction to 73unexpected CEO deaths.We found support for our theorizing among two of three sources of CEO power.Thus,although regulatory trends increasingly support outside director dominated boards,our ?ndings indicate that this may not always bene?t shareholders and that CEO power should be considered when constructing boards.

INTRODUCTION

Understanding the determinants of ?rm performance is central to strategic management research (Rumelt et al.,1994),and the composition of the board of directors is one potential determinant that has received signi?cant attention (Pearce and Zahra,1992).According to agency theory,CEOs are self-interested,risk averse,and possess goals that diverge from those of shareholders.Thus,CEOs will engage in self-serving actions at shareholders’expense when given an opportunity (Jensen and Meckling,1976).Boards dominated by outside directors (i.e.directors that are af?liated with the ?rm only through their board membership)are thought to help protect shareholders from CEOs’self-serving behaviour by monitoring CEOs and offering them incentives to act in share-holders’interests (Fama and Jensen,1983).Accordingly,?rms with greater dominance by outside directors should experience greater ?rm performance.

Unfortunately,three recent meta-analyses have not clari?ed whether boards domi-nated by outside directors affect ?rm performance.Rhoades et al.(2000,p.85)conclude Address for reprints :James https://www.doczj.com/doc/3813790605.html,bs,Department of Management,College of Business,Florida State University,Tallahassee,FL 32306-1110,USA (jcombs@https://www.doczj.com/doc/3813790605.html,).

?Blackwell Publishing Ltd 2007.Published by Blackwell Publishing,9600Garsington Road,Oxford,OX42DQ,UK and 350Main Street,Malden,MA 02148,USA.

Journal of Management Studies 44:8December 2007

doi:10.1111/j.1467-6486.2007.00708.x

that outside directors have ‘a small positive relationship with ?nancial performance’.Wagner et al.(1998)found an inverted U-shaped relationship such that ?rm perfor-mance is highest among boards with large numbers of either outside or inside directors,and Dalton et al.(1998,p.282)found ‘no evidence of a substantive relationship’.Taken together,these results suggest that ambiguity still surrounds the relationship between board structure and ?rm performance.We draw on agency and power circulation theories to advance understanding about this relationship by investigating one potential moderator:CEO power.

Based on agency theory,we argue that board composition concerns shareholders mainly when a CEO is powerful.In our study,CEO power refers to the potential for the CEO to leverage ownership or position to pursue her or his own goals.A CEO whose power remains unchecked by outside directors is more likely to take self-serving actions that decrease shareholder wealth (e.g.Dunn,2004;Frankforter et al.,2000).When a CEO’s power is low,however,power circulation theory suggests that monitoring by other executives is suf?cient to protect shareholders (Ocasio,1994).Indeed,in such cases,an outside director dominated board might present an unnecessary and even counter-productive layer of control (Baysinger and Hoskisson,1990).

We examine the potential moderating role of CEO power using data from 73US ?rms that experienced unexpected CEO deaths.Following an unexpected death,stock prices should adjust to re?ect shareholders’perception of the ?rm’s value without the deceased.Management cannot manipulate the timing of unexpected deaths.Thus,they provide a rare,unspoiled glimpse into how certain variables,such as board composition and CEO power,shape ?rm value.Unexpected death is the only event that permits capturing shareholder reactions to a CEO’s departure independent from the successor because the successor is typically announced later.[1]In other successions,such as forced resignation or relay succession,it is impossible to untangle how much of the market’s reaction re?ects the incumbent’s departure versus the successor’s arrival.

Given these strengths,prior articles have studied managerial deaths.Evidence to date suggests that key executive deaths garner little overall reaction from shareholders (Worrell et al.,1986)but that the variance among reactions can be explained by posi-tion and other situational variables.Speci?cally,CEO deaths initiate small negative reactions (Worrell et al.,1986),but founder (Johnson et al.,1985)and chair (Etebari et al.,1987)deaths spark positive reactions.If the deceased was overpaid,reactions to the death appears split according to whether the overpayment was more likely due to managerial talent or entrenchment (Combs and Skill,2003).Our study continues in this tradition by investigating how reactions vary according to CEO power and board composition.

This study offers three contributions.First,it furnishes an explanation for why prior investigations of the board composition–?rm performance relationship returned equivo-cal results;CEO power moderates the link.Second,the study advances theory by developing and testing a synthesis of agency and power circulation theories.Third,our ?ndings offer practical implications for how boards should manage CEO power,insights that are highly salient in light of recent corporate scandals centred on powerful CEOs at ?rms such as Enron,Parmalat,Tyco,and WorldCom,and in light of growing regulatory pressure towards increasing the number of outside directors on boards.

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The Effect of CEO Power1301 THEORETICAL BACKGROUND

Agency Theory

Agency theory has guided much of the board composition–?rm performance literature. Agency theory considers relationships where responsibility is delegated from principals to agents.Agents are assumed to be self-interested and to possess goals that diverge from those of principals(Eisenhardt,1989).Thus,principals must align agent interests with their own through some combination of incentives that tie agent rewards to principals’outcomes and direct monitoring of agent behaviour.Application of these ideas to the executive suite suggests that,without adequate incentives and monitoring,CEO-agents will emphasize their personal wealth and job security at shareholder-principals’expense (Shleifer and Vishny,1989).

The task of furnishing adequate incentives and monitoring falls?rst to the board of directors.As formal representatives with a legal?duciary responsibility,board members are shareholders’?rst line of defence against self-serving actions by CEOs(Walsh and Seward,1990).Researchers have largely focused on‘outside’directors who are not current or past employees and who do not have substantial business or family ties with management(Johnson et al.,1996).Such directors do not depend on the CEO for a signi?cant source of income and they have an incentive to preserve their reputation as experts in decision monitoring and control(Fama and Jensen,1983).From the perspec-tive of agency theory,outside director dominated boards are better positioned to protect shareholders,and?rms with such boards should have superior performance. Without denying the resource and service roles of outside board members,agency theory focuses on directors’control function(Hillman and Dalziel,2003).The theory does not argue that outside director dominance equals board power,but it does suggest a strong correlation.Outside directors largely depend on the CEO for their board seats (Walsh and Seward,1990)and they are subject to ingratiation and other subtle forms of manipulation that weaken their independence(Westphal,1998).However,unlike inside directors who can be summarily dismissed by the CEO,often with few questions from other board members(Pitcher et al.,2000),outside directors are much less dependent on the CEO.Consequently,while not always the case,on average,outside director domi-nance strengthens boards’ability to force CEOs to act in shareholders’interests.Indeed, boards dominated by outside directors are more likely to accept takeover bids(Buchholtz and Ribbens,1994),and less likely to adopt poison pills(Brickley et al.,1994),offer golden parachutes(Singh and Harianto,1989),or re-price underwater options(Pollock et al.,2002).

Yet decades of research capped by three meta-analyses are equivocal about whether the effects of outside directors on pro-shareholder actions carry through to?rm perfor-mance.One possible reason is that researchers have not yet identi?ed contingency factors that moderate the relationship.Given the role of power in agency theory,CEO power is likely one factor that in?uences the effectiveness of outside directors.

Power is the ability to in?uence others(Yukl,1998).According to agency theory,the position of CEO confers considerable power over a?rm’s resources because shareholders are widely dispersed and no one shareholder can exert direct control(Jensen and Meckling,1976).In addition to the power granted by their title,many CEOs possess power

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sources such as long tenure and chairing the board (Daily and Johnson,1997).Although research on CEOs shows that there can be many positive bene?ts of a powerful CEO,such as clear lines of authority,faster strategic response times,and a focal point for external accountability (Cannella and Monroe,1997;Finkelstein and D’Aveni,1994),for those decisions where shareholder and manager interests diverge,agency theory leaves little room for CEOs to use their power for shareholder bene?t unless coerced or offered incentives to do so (Frankforter et al.,2000).Effective board monitoring can help prevent abuses of power and also ensure that CEO power is used to bene?t the ?rm (Finkelstein and D’Aveni,1994).Thus,from the perspective of agency theory,CEO power gives rise to the need for an outside director dominated board,and accordingly,as CEO power grows,outside directors take on increasing importance (Fama and Jensen,1983).Power Circulation Theory

Power circulation theory was developed to explain political dynamics among societal elites (e.g.Michels,1962)and was extended to the corporate governance context by Ocasio (1994)and Shen and Cannella (2002).The theory portrays the top management level of organizations as inherently political,characterized by shifting coalitions and continual power struggles (Ocasio,1994).Power circulation challenges the notion that CEOs can perpetuate their power (Ocasio,1994;Pareto,1968).Instead,it suggests that power erodes and dissipates over time due to political obstacles arising from an increas-ing number of enemies and rivals as one rises in the ?rm.Power circulation is formed by the interplay of two mechanisms:obsolescence and contestation (Ocasio,1994).Obso-lescence implies that CEOs become stagnant and outdated because of their ties to past decisions (Miller,1991).Contestation arises from other executive of?cers who are viewed as rivals for the CEO’s position (Pfeffer,1981).The degree of contestation is a function of the number and strength of potential rivals.Thus,periods of political stability are only transitory states underlined by struggles for power between shifting political conditions.Managers who also sit on the board (inside directors)are of particular interest because they are best positioned to challenge a sitting CEO.

In power circulation theory,CEOs are viewed as potentially vulnerable leaders of a dominant managerial coalition.While the CEO’s authority is accepted,other executives are highly motivated to detect and react to shortcomings of the CEO because each of them may have the potential to become CEO and accrue greater prestige and wealth if the incumbent is replaced (Henderson and Fredrickson,2001).Selection of an internal successor after a CEO’s dismissal is thus viewed as a successful power challenge to the exiting CEO (Shen and Cannella,2002).Even a manager with little chance of becoming the next CEO is concerned with the incumbent’s performance because poor performance increases the risk of termination for all top executives (Kesner and Dalton,1994),and the external labour market assesses candidates’competency based on their current ?rm’s success (Cannella et al.,1995).Given that the stain of poor performance tarnishes all of a ?rm’s executives,not just the CEO,power circulation theory asserts that other executives are driven to scrutinize the CEO and form a coalition to oppose the CEO if necessary (Ocasio,1994).Consistent with power circulation theory,poor performance appears to give other managers an opportunity to induce CEO succession (Ocasio,1994)https://www.doczj.com/doc/3813790605.html,bs et al.

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The Effect of CEO Power1303 As it does in agency theory,power plays a central role in power circulation theory (Shen and Cannella,2002).As CEOs gain sources of formal and reward power,they enhance their ability to maintain a dominant coalition(Pearce,1995)and reduce the probability of a power contest(Berger,2005).Although other executives have strong motivations to contest the CEO,they also are employees and a CEO’s justi?cation for terminating another top manager is rarely questioned(Cannella and Shen,2001;Stiles, 2001).Powerful CEOs can eliminate potential challengers easily(Pitcher et al.,2000). Thus,a contesting coalition must be sure it has the legitimacy and power to win(Ocasio, 1994).Otherwise,the incentive for other members of management is to align with the CEO to defend their position and maximize their rewards within the existing power structure(Boeker and Goodstein,1993).In sum,monitoring by other executives might be effective among low-power CEOs as circulation theory asserts,but such monitoring might lose its potency among high-power CEOs.

Ocasio(1994)applied power circulation theory to?rms in decline.We move beyond this view by applying the theory to a broad cross-section of?rms.Thus,we suggest that power constantly circulates rather than only during times of decline.We also move beyond Ocasio(1994)by focusing on how CEO power interacts with the power of other managers,speci?cally managers who sit on the board.The circulation of CEO and managerial power has rami?cations for how boards should be structured because the effectiveness of power circulation might vary across different levels of CEO power.We offer a contribution to understanding power circulation theory beyond that of Shen and Cannella(2002)in that our study focuses on the consequences of contestation,as viewed by investors,rather than its antecedents.

Towards a Synthesis of Agency and Power Circulation Theories

The assumptions underlining power circulation are broadly consistent with agency theory.Both assume managers are self-interested and that their interests do not neces-sarily align with shareholders’interests.Both also imply that CEO behaviour must be monitored for the bene?t of the?rm and its shareholders.It is noteworthy that moni-toring by other managers,called mutual monitoring,also occurs in agency theory; managers not only monitor subordinates,but subordinates monitor managers(Fama, 1980;Fama and Jensen,1983).Thus,the theories’differences regarding monitoring are mainly a matter of emphasis.Whereas agency theory recognizes monitoring by other managers(Fama,1980;Fama and Jensen,1983),the bulk of theoretical and empirical advances focus on the role of the board because of its legal duty to oversee management (Johnson et al.,1996).Power circulation similarly recognizes that boards have a role,but the role is left unspeci?ed.Because of their different emphases,neither theory explains when these alternative sources of monitoring–boards and other managers–are most effective(Rediker and Seth,1995).

Viewed broadly,agency theory focuses primarily on the mechanisms for circumvent-ing self-serving behaviours by CEOs with particular focus on the board,while power circulation theory centres on the latent and overt jockeying for position among rival executives.Together these theories help explain previously equivocal results concerning the board composition–?rm performance relationship.Speci?cally,we posit that?rm

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performance is maximized when the oversight by outside director dominated boards is matched with the level of CEO power.Other executives are suf?cient to counterbalance potential self-serving actions among low-power CEOs,but outside board members are needed to effectively control high-power CEOs.

In regard to CEO power,there are two divergent views.Whereas agency theory takes a dim view of power as something that needs to be limited and controlled,the strategic leadership literature views power as a necessary tool for enhancing organi-zational effectiveness (Cannella and Monroe,1997).CEO power allows for faster stra-tegic response times and offers a focal point for external accountability (Finkelstein and D’Aveni,1994).Strong leadership establishes a clear line of authority within the ?rm and minimizes the potential for executive con?ict and political intrigue (Finkelstein and D’Aveni,1994).Powerful executives facilitate success by motivating employees to serve organizational goals (Andrews,1971).Thus,whereas it is important that effective monitoring is in place to ensure that shareholder interests remain central as agency theorists assert,powerful managers can be an important source of competitive advan-tage (Castanias and Helfat,1991;Daily and Johnson,1997).

It is also possible for too much board control to result in negative consequences for shareholders.Outside directors often lack the in-depth knowledge of a ?rm’s opera-tions that is needed to distinguish between performance outcomes that are in versus out of management’s control (Baysinger and Hoskisson,1990).Consequently,outside director dominated boards tend to lean heavily on short-term accounting and stock market data to evaluate top management’s performance,which furnishes management with a strong incentive to smooth out earnings ?uctuations and avoid investments with high risks and long-range paybacks (Baysinger and Hoskisson,1990).Not surprisingly,?rms with outside director dominated boards tend towards greater diversi?cation (Hoskisson et al.,1994;Pearce and Zahra,1992)and under invest in research and development (Baysinger et al.,1991;Hill and Snell,1989).Thus,having a board dominated by outside directors is potentially counterproductive.This might be espe-cially true among ?rms with low-power CEOs where other executives appear suf?cient to monitor and control the CEO.

Given the logic above,shareholders should display low levels of concern about board composition when CEOs lack power beyond that granted by their CEO title.If moni-toring by other executives constrains the potential for self-serving actions among low-power CEOs,as we assert,then there is no need for an additional,and potentially counterproductive,layer of control in the form of an outside director dominated board.Likewise,as the CEO gains power beyond what is granted by their job title,shareholders should view such increases in power positively if an outside director dominated board is there to make sure the power is being used towards their betterment.Without such a board,CEO power should become a concern because shareholders can no longer rely on other managers to effectively monitor the CEO’s actions.

HYPOTHESES

We now consider the implications of the above theorizing for ?rm performance,as represented by abnormal stock returns in the context of an unexpected CEO https://www.doczj.com/doc/3813790605.html,bs et al.

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Table I summarizes the expected relationships.These general relationships are explained below,and they offer the foundation for our speci?c hypotheses.

In the case of an outside director dominated board and a high-power CEO (Quadrant I),CEO death should result in a decrease in the ?rm’s stock price.High CEO power facilitates strategic focus and speeds implementation while the outside director domi-nated board keeps in check any potential self-serving actions by the CEO.For example,the stock of Atlas Air (cargo)fell 4.7per cent upon the death of its 45-year-old founder in a plane crash.He was a major shareholder and both Chair and CEO,but only two of the seven board members were insiders.When an outside director dominated board counterbalances a powerful CEO,shareholders can have greater con?dence that the CEO’s power is being used for their bene?t.Thus,in the presence of an outside director dominated board,the sudden loss of a powerful but board-constrained CEO should de?ate stock prices.

In the case of an inside director dominated board and a high-power CEO (Quadrant II),CEO death should result in an increase in the ?rm’s stock price.The CEO might be

Table I.Expected relations among CEO power,board composition,and stock market returns

Following a n u nexpected c h ief exec u ti v e of?cer de a t h

Out si de d i rector dom i nated board

In si de d i rector dom i nated board H i gh CEO power I I I

Pred i ct i on:

The ?rm’s s tock pr i ce s hou l d fa ll .

Pred i ct i on:The ?rm’s s tock pr i ce s hou l d r is e.W h y?T h e ?rm ha s lost a CEO w h ose

power f a cilit a ted good str a tegic foc u s

w h ile t h e bo a rd reigned in a ny potenti a l

self-ser v ing a ctions by t h e CEO.T h e

de a t h represents a n o v er a ll loss to

s ha re h olders.

W h y?T h e dece a sed ha d a h ig h prob a bility of a cting in self-ser v ing w a ys a nd eroding s ha re h older va l u e.T h e de a t h represents a n opport u nity for a s h ift to a more bo a rd constr a ined CEO a nd t hu s a potenti a l g a in for s ha re h olders.Low CEO power

V I I

I I Pred i ct i on:

The ?rm’s s tock pr i ce s hou l d r is e.

Pred i ct i on:The ?rm’s s tock pr i ce s hou l d fa ll .W h y?T h e bo a rd w a s a n excessi v e a nd

potenti a lly co u nterprod u cti v e l a yer of

control.T h e likely s u ccessor will be a n

o u tsider wit h a n est a blis h ed r a pport

wit h t h e bo a rd.T h e de a t h represents a n

opport u nity to impro v e a poor sit ua tion.W h y?T h e dece a sed w a s foc u sed on t h e long-term in v estments t ha t inside director domin a ted bo a rds f a cilit a te.T h e likely s u ccessor will be a lesser-known,less powerf u l insider.T h e de a t h represents incre a sed

u ncert a inty a nd a n o v er a ll loss to

s ha re h olders.The Effect of CEO Power

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using power to advance shareholder interests,but there is no way for shareholders to be sure.Outside directors on the board are needed to protect shareholder interests as agency theory anticipates.When CEOs gain power under inside director dominated boards,the probability that CEOs will take self-serving actions increases and sharehold-ers will discount stock prices accordingly.Thus,among high-power CEOs,if a ?rm’s inside director dominated board did not effectively check CEO power,previously discounted share prices should rebound upon the CEO’s death.The share price of Wometco Enterprises (a soft drink bottler)rose almost 10per cent after its long-time founder’s heart attack in 1983.With only one independent director,death was Wometco shareholder’s best hope for a management shake-up.

In the case of an outside director dominated board and a low-power CEO (Quad-rant III),CEO death should also result in an increase in the ?rm’s stock price.Power circulation theory suggests that monitoring by other executives should furnish a suf?-cient counterweight to the risk that low-power CEOs might attempt self-serving actions.Thus,an outside director dominated board is potentially both redundant and counterproductive.Outside director dominated boards use more formal (usually ?nan-cial)controls that induce low-power CEOs to under invest (Baysinger et al.,1991).The result is that stock prices were likely discounted prior to the death.Such discounting might reverse upon death with the hope that a strong outside successor will be selected.Outside directors are less likely to know potential inside successors well and,considering their external network ties,they are likely predisposed to replace the CEO with a well-known CEO from another ?rm (Harris and Helfat,1998).Such a successor will have pre-existing personal ties with the directors,which offers the new CEO some initial power (Westphal and Fredrickson,2001).For example,the death of Bankshare CEO (but not chair)Saul Binder in 1998resulted in an 11per cent stock bump,potentially on the speculation that the board would seek an external replacement,which they did by stealing a top executive from Bank One.Finally,an outside director dominated board might be more likely to give the new CEO a honeymoon period in which to learn the job (Shen,2003).

In the case of an inside director dominated board and a low-power CEO (Quadrant IV),CEO death should result in a decrease in the ?rm’s stock price,as it did (by 5per cent)when the CEO of US Energy Systems died in 1999.Power circulation theory suggests that shareholders should be less concerned with outside director dominated boards when the CEO has little power beyond that conferred by his or her formal position.Such a CEO can be viewed as the leader of a dominant coalition focused on improving performance because,according to power circulation theory,evidence of continued prosperity is the only thing holding the coalition together (Ocasio,1994).The sudden death of a CEO with such strong performance incentives represents lost potential and creates uncertainty,which should de?ate the stock.Moreover,in this instance the new CEO is likely to be an insider,which turned out to be the case for US Energy Systems.Thus,the sudden death can be viewed as leading to a continuation of the status quo,but with a less known CEO.

We now examine the moderating effects of CEO power on the board composition–?rm performance relationship among the three most widely researched sources of CEO power vis-à-vis the board:tenure,ownership,and duality (Cannella and Shen,2001)https://www.doczj.com/doc/3813790605.html,bs et al.

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The Effect of CEO Power1307 CEO Board Tenure

Tenure is a key ingredient in the process of building power.The security of the CEO position can be tenuous in the early years when they depend on the knowledge and insights of other members of the executive team(Fredrickson et al.,1988).At this time,CEOs are also developing leadership skills that will eventually have a profound effect on the?rm (Shen,2003).Because they can be adequately monitored by an inside director dominated board(Rediker and Seth,1995),shareholders should mourn the lost potential represented by a short-tenured CEO upon unexpected death–assuming an over-controlling outside director dominated board had not been leading the CEO to divert resources to increase personal job security(e.g.by over diversi?cation–Amihud and Lev,1981).

Over time,however,CEOs establish a performance record and build relationships with key stakeholders,making them less susceptible to removal(Haleblian and Rajago-palan,2006;Hill and Phan,1991).The additional power that long-tenured managers possess enables them,for example,to in?uence the design of their compensation(Hill and Phan,1991)or get covered by a golden parachute(Singh and Harianto,1989).Such outcomes only are possible,however,if permitted by the board.

We focus on a CEO’s board tenure rather than job tenure;the former depicts all of the time the manager was in a position to build key relationships and it is not affected by movement among top management positions(Combs and Skill,2003).If an outside director dominated board balances the power gained through long tenure,shareholders can have greater con?dence that the CEO’s power is being used to advance their interests(e.g.Rosenstein and Wyatt,1990).Thus,stock prices should decline upon the death of a long-tenured CEO who had been monitored by an outside director dominated board and rise in response to the unexpected removal of a long-tenured CEO who had not been similarly constrained.Stated formally:

Hypothesis1:CEO board tenure moderates the board composition–?rm performance relationship.Speci?cally,the greater CEO board tenure,the more negative the relationship between the proportion of outsiders on the board and abnormal stock returns following an unexpected CEO death.

CEO Ownership

Ownership is an important source of power(Daily and Johnson,1997),but because it binds CEO and shareholder wealth it also furnishes a strong performance incentive(Fama and Jensen,1983).CEOs with substantial ownership are more likely to accept lower pay (Gomez-Mejia et al.,1987),less likely to have their options re-priced(Pollock et al.,2002), and less likely to resist takeover threats(Buchholtz and Ribbens,1994).However,because CEOs are susceptible to self-serving bias wherein they attribute poor performance externally(Clapham and Schwenk,1991),CEOs with ownership power can and do hold on to their positions beyond their point of effectiveness(Boeker,1992).Low ownership CEOs can be more easily removed by a coalition of insiders(Ocasio,1994).Knowing that CEO ownership increases the risk that the CEO will cling to power,shareholders should discount share prices unless enough outsiders are on the board to remove the CEO if

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necessary.Upon death,previously discounted prices should rebound while shares of ?rms with board-constrained CEOs should decline in response to the loss.[2]Accordingly:Hypothesis 2:CEO ownership moderates the board composition–?rm performance relationship.Speci?cally,the greater the CEO ownership,the more negative the relationship between the proportion of outsiders on the board and abnormal stock returns following an unexpected CEO death.

CEO Duality

Power is also conferred through formal position.One way CEOs acquire additional position power is to be given the dual roles of CEO and board chair (Daily and Johnson,1997).In order for monitoring by other executives to be effective on inside director dominated boards as predicted by circulation theory,the chair should be given to a knowledgeable independent director who is in contact with multiple execu-tives (Lorsch and MacIver,1989).Otherwise,challengers to CEO actions might be subject to unquestioned dismissal (Stiles,2001).Outside director dominated boards often confer duality to otherwise low-power CEOs in order to enhance unity of direc-tion and offer a focal point for accountability (Finkelstein and D’Aveni,1994).However,when duality is conferred under an inside director dominated board,the opportunity for CEOs to take unchallenged self-serving actions increases.Dunn (2004),for example,found that dual CEO-chairs are more likely to publish fraudulent ?nan-cial statements.Given the risks of duality under inside director dominated boards,shareholders should discount share prices.If duality is conferred under an outside director dominated board,the bene?ts of duality should outweigh its risks (Finkelstein and D’Aveni,1994)and shareholders should value share prices accordingly.As with the other sources of power,we expect these relationships to reverse following an unex-pected death:

Hypothesis 3:CEO duality moderates the board composition–?rm performance rela-tionship.Speci?cally,under duality,there is a negative relationship between the proportion of outsiders on the board and abnormal stock returns following an unex-pected CEO death.

METHOD

Sample

The hypotheses were tested using standard event study methodology,which attempts to isolate shareholder reactions to a speci?c event.Our event of choice was the sudden death of a CEO because this event offers the rare opportunity to capture how share-holders valued the deceased.We began with 92?rms listed on US stock exchanges that experienced an unexpected CEO death between January 1978and August 2001.We viewed September 2001as a natural breakpoint for data collection because the horri?c terror attacks in the USA that month constitute a contaminating event from the https://www.doczj.com/doc/3813790605.html,bs et al.

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spective of an event study.Unexpected deaths are surprising events that cannot be anticipated.In our sample,44per cent died from heart attacks;25per cent from unknown causes;18per cent from crashes,either automobile or airplane;and 13per cent from miscellaneous causes/events,such as a stampede or ballooning accident.A death had to be unexpected because shareholders might have reacted prior to the death if it were predictable,such as ‘after a brief illness’or ‘following a battle with cancer’,making it impossible to capture the reaction.We located unexpected deaths by searching the obituary section of Standard and Poor’s Register of Corporations,Directors and E x ecutives ,T he Wall Street Journal ,LexisNexis (major newspapers and news services),and the ‘president’s letter’and ‘other corporate events’sections of the Disclosure database.Firms that were not listed on COMPUSTAT or CRSP,or that failed to ?le proxy statements with the US Securities and Exchange Commission could not be included.In an event study,share-holder reactions must not be contaminated by other salient events,such as earnings and dividend announcements or the announcement of the deceased’s successor (McWilliams and Siegel,1997).We eliminated 19?rms because a potentially contaminating event occurred within one trading day of the event date.Table II lists the 73?rms and event dates in the ?nal sample.

Dependent Variable:Abnormal Returns

Our dependent variable was the abnormal return generated using standard event study methodology.Henderson (1990)stresses that the event date must be the date when the best-informed investors could have received the news.Thus,the event date was the date of death or the ?rst trading day thereafter if death occurred on a non-trading day.The event date (day 0)and one trading day after the date of death (day +1)comprised the event window.Longer windows can seriously jeopardize results’validity because of the potential for contamination (McWilliams and Siegel,1997).

To obtain abnormal returns,we ?rst estimated ‘normal’returns by regressing daily ?rm returns on daily market returns over 221trading days,from event day -250to -30:

R R jt j j mt jt =++αβε.(1)

R jt is the return for ?rm j for day t and R mt is the value-weighted market return for day t .Daily abnormal returns (AR jt )were obtained by subtracting predicted,or normal,returns from actual returns for each day of the event window:

AR R R jt jt j j mt =????.αβ(2)

AR jt is the abnormal return for ?rm j on day t of the event window.R jt is the actual return for ?rm j on day t of the event window,??αβj j ?are the predicted parameters for ?rm j from the regression in equation 1,and R mt is the value-weighted market return for day t of the event window.Cumulative abnormal returns (CAR s)are the sum of the abnormal returns during the event window:

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Table II.Sample ?rms,event dates,four-digit SIC industries,and asset values in 2001dollars Firm

Event date Primary 4-digit SIC industry Assets a Tally Ind.

6/19/1978Missiles &space vehicle parts 748.18Tandy Corp.

11/6/1978Consumer electronics stores 1,393.01Oakwood Homes Corp.

12/11/1978Mobile homes 61.95Geosource Inc.

3/14/1979Oil,gas exploration services 416.58Surdstrand Corp.

3/14/1979Aircraft parts &auxiliary equip.1,653.11Avnet Inc.

6/16/1980Wholesale electrical parts &equip.1,154.57Health Mor

9/8/1981Metal forgings &stampings 43.6Dresser Ind.

7/19/1982Industrial machinery &equip.6,252.89Sikes Corp.

8/3/1982Structural clay products 61.15F.W.Woolworth Co.

10/26/1982Variety stores 6,845.98Househould Int’l

11/15/1982Personal credit unions 12,003.53Tyco Labs.

12/17/1982Misc.industrial machines &equip.593.45Wometco Enterprises

1/28/1983Soft drinks &carbonated waters 876.79Warnaco Inc.

5/17/1983Women’s,children’s clothes 524.8Gold?eld Corp.

6/10/1983Water sewer &utility contractors 22.46Ranchers Exploration &Dev.

6/27/1983Metal mining 113.44Fluke Mfg Corp.

2/13/1984Electrical instruments 249.02Iowa-Illinois Gas &Electric

3/28/1984Electric &other services 1,905.16PSA Inc.

5/11/1984Wholesale petroleum products 1,388.86Wrather Corp.

11/12/1984Hotels &motels 275.15MPA Corp.

9/29/1986Operative builders 348.03Westcoast Transmission

8/13/1987Natural gas transmission &dist.2,359.87Honeybee Corp.

9/8/1987Catalogue &mail-order houses 8.59Avnet Inc.

12/22/1988Wholesale electrical parts &equip.1,663.11Martin Processing Inc.

4/17/1989Newspaper publishing &printing 506.81M/https://www.doczj.com/doc/3813790605.html, Inc.

9/21/1989Misc.electronic components 910.72Whitman Corp.

11/6/1989Soft drinks &carbonated waters 7,626.14Curtis Wright Corp.

3/19/1990Misc.primary metal products 485.47Occidental Petroleum

12/10/1990Crude oil &natural gas 31,188.9Gillette

1/25/1991Cutlery,handtools,&hardware 4,466.08Pogo Producing

3/1/1991Crude oil &natural gas 603.65Ranger Oil

6/10/1991Crude oil &natural gas 810.06Howell Ind.

9/30/1991Metal forgings &stampings 37.37Nicolet Instruments Corp.

12/11/1991Laboratory analytical instruments 150.89Earl Scheib

3/2/1992Automotive repair &services 50.01Sterling Bancorp

5/26/1992National commercial banks 726.52Time Warner

12/21/1992Periodical publishing &printing 34,475.38Holman

4/13/1993Cement,hydraulic 1,901.91Esquire Radio &Electric

5/7/1993Wholesale electrical parts &equip.39.71He-Ro Group

9/24/1993Women’s &juniors’outerwear 101.69Mylan Labs

11/8/1993Pharmaceutical preparations 296.03Ampco-Pittsburgh

9/8/1994Industrial fans &blowers 241.75Glenway Financial Corp.

12/19/1995Savings institutions,federal 304.86Bradley Real Estate Inc.

2/8/1996Real estate investment trusts 207.12Air &Water Technologies

4/4/1996Engineering services 628.58Texas Instruments

5/29/1996Semiconductors &related devices 10,571.62Cellegy Pharmaceuticals

7/9/1996Pharmaceutical preparations 4.62Danielson Holding Corp.

7/17/1996Fire,marine,&casualty insurance 261.47

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CAR AR jt t t t ==∑01.

(3)

CAR s represent the stock’s two-day cumulative abnormal stock returns attributable to CEO death:the dependent variable in this study.

Independent Variables

Board composition.Consistent with Mallette and Fowler (1992)we measured board com-position as the proportion of outsiders ,where outside directors are those who are not current or past employees and who do not have substantial business or family ties with manage-ment.We acknowledge that the proportion of outsiders does not equate to true board independence.Outside directors are often indebted to CEOs for their board seats (Walsh and Seward,1990)and they can be in?uenced by CEO ingratiation and persuasion tactics (Westphal,1998).However,we argue that an outside director dominated board will be

Table II.Continued

Firm

Event date Primary 4-digit SIC industry Assets a Midland Financial Group Inc.

7/18/1996Fire,marine,&casualty insurance 325.27Gerber Scienti?c

8/8/1996Special industry machinery 359.07Gray Communications Sys.Inc.

9/9/1996Television broadcasting stations 334.27Cavalier Homes Inc.

10/29/1996Mobile homes 129.35Boston Acoustics Inc.

11/19/1996Household audio &video equip.47.27Western Ohio Financial Corp.

1/16/1997Savings institutions,federal 439.59La-Z-Boy Inc.

10/14/1997Household furniture 630.63ACC Corp.

12/5/1997Telephone communications 347.31South Jersey Industries Inc.

12/28/1997Natural gas distribution 728.7OEA Inc.

1/17/1998Motor vehicle parts &accessories 360.28Camco International Inc.

5/11/1998Oil &gas ?eld machinery &equip.128.05Success Bancshares Inc.

7/12/1998State commercial banks 511.24SpectraScience

12/11/1998Electromedical &electrotherapeutics 0.88Penobscot Shoe Co.

12/27/1998Footwear,except rubber 16.45Crown American Realty

4/21/1999Real estate investment trusts 928.81Avalon Holdings Corp.

9/5/1999Trucking &courier services 69.83Grand Court Lifestyles Inc.

10/25/1999Fire,marine,&casualty insurance 335.81Wendy’s Int’l

12/18/1999Eating places 1,980.88U.S.Energy Systems Inc.

1/24/2000Electrical services 15.1Herbalife International Inc.

5/21/2000Wholesale drugs &drug sundries https://www.doczj.com/doc/3813790605.html,

10/20/2000Prepackaged software 6.86Dallas Semiconductor Corp

11/16/2000Semiconductors &related devices 578.83Atlas Air

1/24/2001Refrigerated warehousing &storage 2,226.24LifePoint Hospitals Inc.

6/2/2001General medical &surgical hospitals 499.71Hologic Inc.

6/21/2001X-ray apparatus &irradiation equip.224.93Note :a Total assets in millions consumer price indexed to from year of death to 2001dollars.

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more independent that an inside director dominated board because outsider directors are not in an employment relationship.Thus,they are more capable of acting against a powerful CEO,even if needed action might be delayed.Outside director dominated boards have been linked to pro-shareholder actions such as fewer poison pills (Brickley et al.,1994),stock option re-pricing actions (Pollock et al.,2002),and golden parachutes (Singh and Harianto,1989).Thus,we suggest a positive empirical relationship between board composition as measured by the proportion of outsiders and independence.

Po w er.Tenure-based power emerges from key relationships and knowledge that man-agers build over time (Walsh and Seward,1990).T enure was measured as the number of years the deceased had served on the board.We used board tenure rather than job tenure because board tenure depicts all of the time the manager was in a position to build key relationships and it is not affected by movement among top management positions (Combs and Skill,2003).Ownership power is revealed in the CEO’s legal right to exercise control as a major shareholder (Daily and Johnson,1997).O w nership was mea-sured as the percentage of voting shares controlled by the deceased (e.g.Cannella and Shen,2001).Duality power results from having multiple titles,speci?cally CEO and board chair.Duality was measured using an indicator variable depicting whether the deceased was also the board chair (duality =1).

Power is multifaceted (Finkelstein,1992).While no measure is likely to capture every possible dimension of the power construct,the three sources of power that we examine here (tenure,ownership,and duality)are the most researched and best supported in extant literature (Cannella and Shen,2001).Although other sources of power,such as charisma and competence are perhaps not well depicted by these proxies,presumably some relationship exists between these more dif?cult-to-measure aspects of power and our measures.For example,competent CEOs should survive longer (i.e.greater tenure)and be more likely to be offered duality.

Interaction terms.The hypotheses describe moderated relationships wherein the relation-ship between two variables depends on a third.Such relationships can be captured using interaction terms in moderated regression (Aiken and West,1991).Multiplying the values for the two independent variables of interest creates interaction terms,which are then included in the regression.Prior to creating the interaction terms (i.e.proportion of outsiders ￥tenure;proportion of outsiders ￥ownership;and proportion of outsiders ￥duality),the component variables were standardized to reduce multicollinearity (Aiken and West,1991).

Control Variables

To strengthen con?dence in the analysis,we have included several control variables.Controls are those variables that might offer an alternative explanation when left out of a regression model.By including them,the partial correlation coef?cients that test our dhypothesized model can be interpreted as depicting the relationship between the hypothesized interaction terms and abnormal returns,holding constant all other vari-ables in the model.

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The Effect of CEO Power1313 Board size.Prior work has found that both the number of insiders and outsiders relate to ?nancial performance(Wagner et al.,1998),which suggest that the total number of directors in?uences https://www.doczj.com/doc/3813790605.html,rge board size re?ects an organization’s ability to secure needed resources,which enhances organizational performance(Dalton et al., 1999).Board size was measured as the total number of directors on the board.

T otal compensation.One use of CEO power is to pressure the board to increase compen-sation,both contingent and non-contingent(Combs and Skill,2003).Part of shareholder reactions could re?ect anticipated realignment of CEO compensation,thus we con-trolled for total compensation in the year prior to death.Total compensation was calculated as the sum of salary,bonus,and the market value of outstanding options as calculated using the Black–Scholes model.All salary data were in?ated to2001dollars using the Consumer Price Index(CPI).

Blockholder https://www.doczj.com/doc/3813790605.html,rge shareholders have both the incentive and power to monitor CEO actions(Hill and Snell,1989).Thus,blockholder control was included to control for this alternative source of monitoring.It was measured by an indicator variable depicting whether any external shareholder(i.e.not the CEO or members of manage-ment)controlled more than5per cent of the?rm’s shares.

Wall Street Journal.The Wall Street Journal’s editorial policy might affect the type of death reported,such as those of powerful managers from large?rms,and because of the Journal’s prominence,the size of subsequent reactions.It was measured as an indicator variable depicting whether the death was announced in the Wall Street Journal.

Year of death.Year of death was used to control for the possibility that improvements in information technology might permit more investors to react.Further,governance practices have not remained stationary during the study period(Pye,2003).If any of the relationships of interest have changed in a linear way,the effects should be captured by this control variable.

Prior performance.Shareholder reactions to CEO death are likely in?uenced by the per-formance of the?rm in the year prior to death.Shareholders likely react negatively to the deaths of CEOs at high performing?rms.To hold this component of the shareholder reaction constant,we controlled for?rm performance in the year prior to the death. Prior performance was measured as the?rm’s overall stock return minus the value-weighted-market return during the year prior to death.

Viable successor.CEO deaths create uncertainty and markets react negatively to uncer-tainty.If a?rm has a viable successor,the level of uncertainty is reduced(Davidson et al., 1998).Thus,we controlled for the presence of a viable successor to insure that our hypotheses tests were not confounded by differences in uncertainty due to the availability of a viable successor.We focused on the positions of Presidents and Chief Operations Of?cers(but not board chairs)who sat on the board.These are the people who could

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most easily step into the CEO’s job (Cannella and Shen,2001).Viable successor was measured via an indicator variable depicting whether a viable successor survived the deceased (viable successor =1).

CEO age.Death is highly correlated with age.Thus,our sample likely contains a dispro-portionate number of older CEOs,and shareholders at such ?rms might have factored the potential of CEO death into the stock price.We therefore controlled for CEO age.RESULTS

Table III displays descriptive statistics.Examination of all variance in?ation factors (VIFs)suggested that multicollinearity is not a concern in our data (Aiken and West,1991).

The hypotheses were tested via moderated regression as depicted in Table IV.Model 1includes only control variables.Age is positively and signi?cantly related to abnormal returns (b =0.44;p <0.001),suggesting that shareholders often view older CEOs as entrenched or in?exible and are pleased by their departure.The addition of main effects in Model 2explains signi?cantly more variance (D R 2=0.15;p <0.01).Shareholders reacted positively to the death of CEOs with large ownership stakes (b =0.24;p <0.05),suggesting these CEOs tend to cling to power too long.Also,reactions to the deaths of dual CEO-chairs are signi?cant (b =0.36;p <0.01);investors generally view duality negatively.As suggested by Dalton et al.(1998),there is not a signi?cant main effect between the proportion of outsiders and performance.The three interaction terms in Model 3test our hypotheses predicting a negative relationship between abnormal returns and the proportion of outsiders when CEO power is high.The addition of the interaction terms in Model 3explains signi?cantly more variance (D R 2=0.17;p <0.001).The results do not support Hypothesis 1,which focuses on tenure (b =-0.02;n.s.),but support Hypothesis 2,which focuses on ownership power (b =-0.41;p <0.001),and Hypothesis 3,which focuses on duality (b =-0.22;p <0.05).Examination of the inter-action plots in Figure 1shows that the signi?cant interactions were disordinal as pre-dicted by our theoretical synthesis.That is,the predicted CARs shown in Figure 1mirror the anticipated relationships described in Table I.In sum,results for two of our three measures of power are consistent with our theory-based expectation that CEO power moderates the board composition–?rm performance relationship.

DISCUSSION

Our study offers three contributions.First,the results provide a plausible explanation for why prior investigations of the board composition–?rm performance relationship returned equivocal results;CEO power appears to moderate the link.Second,the study advances theory by developing an amalgam of agency and power circulation theories,and offering evidence consistent with our theorizing.Third,our theory and ?ndings offer practical implications that are particularly relevant in light of recent corporate scandals centred on powerful CEOs and current regulatory trends towards imposing greater numbers of outside directors on boards.Each of these contributions is discussed https://www.doczj.com/doc/3813790605.html,bs et al.

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T a b l e I I I .D e s c r i p t i v e s t a t i s t i c s (n =73)V a r i a b l e n a m e s M e a n S .D .123456789101112

1.

A b n o r m a l r e t u r n s 1.279.252.

P r o p o r t i o n o u t s i d e r s 42.7522.63-0.24*3.

T e n u r e 16.9013.240.33**-0.43***4.

O w n e r s h i p 10.2616.050.32**-0.28*0.205.

D u a l i t y 0.700.460.39**-0.040.38**0.156.

B o a r d s i z e 9.013.440.060.000.07-0.220.36**7.

T o t a l c o m p e n s a t i o n 1.672.11-0.090.22-0.11-0.010.230.148.

B l o c k h o l d e r c o n t r o l 0.510.50-0.230.45**-0.17-0.25*-0.05-0.000.219.

W a l l S t r e e t J o u r n a l 0.650.480.16-0.26*0.26*-0.020.32**0.41**0.06-0.1610.Y e a r o f d e a t h 1991.166.99-0.040.37**-0.220.04-0.20-0.37**0.25*-0.41**-0.5611.P r i o r p e r f o r m a n c e 0.030.42-0.130.00-0.06-0.050.120.040.14-0.010.18-0.0612.V i a b l e s u c c e s s o r 0.410.500.00-0.070.070.130.190.19-0.03-0.07-0.02-0.06-0.1913.A g e 60.2510.730.46**-0.31**0.66**0.010.37**-0.33**-0.11-0.150.17-0.11-0.070.1

5N o t e :a T o t a l c o m p e n s a t i o n s h o w n i n m i l l i o n s .

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Previous results on the board composition–?rm performance relationship have been equivocal.There are two possibilities:either board composition does not materially affect ?rm performance or moderators exist.In the absence of theory offering a moderator,the former interpretation has been accepted (e.g.Dalton et al.,1998).However,the results for two of our three hypotheses tests suggest that perhaps this is an erroneous conclusion.When CEO power is measured via CEO ownership and duality,our results indicate that CEO power moderates the board composition–?rm performance link.Shareholders were relieved by the demise of powerful CEOs when the board was not suf?ciently independent to keep CEOs from taking self-serving actions,and by the deaths of low-power CEOs whose actions were potentially overly cautious due to an excessively controlling outside director dominated board.As shown in Figure 1,stock prices rose after the unexpected deaths of such CEOs.In contrast,stock prices fell after powerful CEOs died if the deceased had served an outside director dominated board,and after the deaths of low-power CEOs whose actions were supported and monitored by insiders (see Figure 1).Whereas previous studies have incorporated CEO power as a control (e.g.Barnhart et al.,1994),our results suggest that efforts to understand the board’s role in shaping performance need to account for the potential moderating role of CEO power.Table IV.Regression results for abnormal stock returns

Model 1

Model 2Model 3Controls

Board size

-0.08-0.10-0.07Total compensation

-0.03-0.12-0.09Blockholder control

-0.21-0.13-0.12Wall Street Journal

0.210.160.27*Year of death

0.180.160.28*Prior performance

-0.14-0.17-0.14Viable successor

-0.08-0.17-0.11Age

0.44***0.46**0.35*Main effects

Proportion outsiders

-0.05-0.01Tenure

-0.21-0.12Ownership

0.24*0.03Duality

0.36**0.32**Interactions

Proportion outsiders ￥tenure

-0.02Proportion outsiders ￥ownership

-0.41***Proportion outsiders ￥duality

-0.22*F

3.36**

4.01*** 6.14***R 2

0.300.450.62D R 2

0.15**0.17***

Notes :n =73.

a Standardized beta coef?cients.

*p <0.05;**p <0.01;***p

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One potentially fruitful avenue for future inquiry might be to examine the extent to which different sources of power affect the board composition–?rm performance rela-tionship differently.Although ownership gives CEOs a powerful incentive to act in the best interest of the ?rm,even to the extent of giving up power in a takeover attempt (Buchholtz and Ribbens,1994),ownership also increases the pressure to engage in fraudulent activity (Dunn,2004)and allows CEOs who might be blind to their own weaknesses stay in power past their point of effectiveness (Boeker,1992).Similarly,duality offers a source of formal power that can only be undone by an outside director dominated board (Daily and Johnson,1997).Tenure,in contrast,was not related to shareholders’reactions as predicted.Whereas high-tenure CEOs might need to be held accountable by an outside director dominated board as we predicted,low tenure CEOs might be more vulnerable to power circulation than we predicted.Shen (2003)argues that new CEOs must be given adequate time to learn their complex jobs and begin

to

CEO Ownership

-4-3

-2

-10123456

Proportion of outsiders

A b n o r m a l s t o c k r e t u r n s (%)ownership

CEO Duality

-16-14

-12

-10-8-6-4-20

Proportion of outsiders

A b n o r m a l s t o c k r e t u r n s (%)Figure 1.Plots of signi?cant interactions

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shape strategy.During this time,new CEOs are vulnerable to contestation from inside directors as predicted by power circulation theory.Perhaps outside director dominated boards are best in the early years as Shen (2003)suggests,but,consistent with our theory,they are harmful in the intermediate years when the CEO is implementing their ideas and necessary later when the CEO’s power is growing.These changing effects would be masked in our hypotheses tests.Thus,future inquiry might bene?t from a greater focus on the processes through which different sources of power affect the importance of board composition,and how different sources of power interact with each other to affect the board’s effectiveness.For example,duality might help offset a new CEO’s vulnerability (Finkelstein and D’Aveni,1994).

A second reason our study is important is that it advances theory.We developed an amalgam of agency and power circulation theories to explain why CEO power should moderate the board composition–?rm performance relationship.Based on power circu-lation theory,we asserted that among low-power CEOs,the potential for inside directors to mount a challenge constrains CEOs’abilities to take serve-serving actions.Further,outside director dominated boards typically rely on short-term performance outcomes,so low-power CEOs might over diversify and under invest in essential long-term activi-ties,such as research and development (Baysinger and Hoskisson,1990:Baysinger et al.,1991).Among high-power CEOs,however,monitoring by inside directors is not suf?-cient to protect shareholders.As predicted by agency theory,an outside director domi-nated board is necessary.As shown in Figure 1,the interactions for ownership and duality with CEO power approximate our theoretical synthesis.

Our ?ndings are consistent with other research suggesting a more complex view of agency theory (e.g.Finkelstein and D’Aveni,1994).Agency theory anticipates a rela-tionship between board composition and ?rm performance based on the assumption that CEOs can and will use their power to take self-serving actions that deplete shareholder wealth (Fama and Jensen,1983).Our theory and results support this contention among high-power CEOs,but not among low-power CEOs,where the impact of monitoring by other executives appears suf?cient as described by power circulation theory.Although agency theory acknowledges a role for mutual monitoring,power circulation helps explain when these alternative mechanisms are effective.Thus,the importance of outside director dominated boards in agency theory appears circumscribed by situation variables such as CEO power.Future inquiry might focus on other CEO attributes that might moderate the effect of board composition on ?rm performance,such as locus of control (https://www.doczj.com/doc/3813790605.html,ler and Toulouse,1986),narcissism (e.g.Kets de Vries,1993),or a sense of justice (e.g.Kim and Mauborgne,1991).

Our third contribution is that practical implications arise from our ?nding that board composition appears increasingly critical as CEO power grows.Stated plainly,members of the board should view powerful CEOs who resist outside directors with caution,as the combination of a powerful CEO and an inside dominated board has facilitated some egregious abuses.For example,while the founding Rigas family controlled ?ve of nine Adelphia board seats,the ?rm guaranteed $3.1billion of the family’s loans,loaned the family $1.8billion,and covered $241million in margin calls.Between January 2001and November 2002,Adelphia shares lost $7.7billion in value (https://www.doczj.com/doc/3813790605.html,/time/2002/greed).The links among CEO power,an inside director dominated board,and https://www.doczj.com/doc/3813790605.html,bs et al.

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